Question marks, best guesses and the reality of the 2012 budget

In a podcast series over the next week, iPolitics contributors Scott Clark and Pete DeVries will consider some of the many ways Canadians can judge Jim Flaherty’s 2012 budget. In today’s edition, the transcript of which appears below, the finance experts consider the international and domestic backdrop to March 29.

In this series of podcasts we’re talking about not just what to expect in Jim Flaherty’s budget but also how we might evaluate his work. While it’s always easy to judge, it’s easier still to judge when you have some guidelines to go by.

So I’m with Scott Clark and Pete DeVries and they have some very specific guidelines that they’re looking to. Among the ways by which we can judge the budget: Is it realistic? Is it responsible? Is it prudent? Transparent and accountable?

So let’s talk in this podcast a bit more about whether or not Jim Flaherty’s budget will take a realistic assessment of international and domestic economic prospects.

One of the reasons we put this one up as one of the guiding criteria as to whether or not the budget was going to be credible is that the track record of this government has not been that good.

You recall back in 2008, when we were in the midst of a recession, Mr. Flaherty came out with an economic statement that said everything was fine, surpluses as far as the eye could see, and not to worry. Even the prime minister said it was a good time to invest in the economy because prices were low.

Well, of course, we saw what happened at that point in time — the economy went into a deep recession and the government responded very quickly with very aggressive stimulus measures — measures that far exceeded what they had to do given the IMF guidelines, given the state of affairs in the Canadian economy at that point in time. So in some cases they overreacted.

Now we’re entering a new phase, whereby the economic environment is very unstable both on an international front and because of that, on a domestic front as well. We’re looking at Europe, which is most likely in a recession, and will be in a recession for some point in time because of the financial crisis and the fiscal crisis that many of the countries are facing at this point in time. We have Greece, we have Spain, we have Italy, we have Portugal, we have Ireland, all sort of raising huge questions as to the fiscal sustainability of those countries and whether or not the euro is going to be the currency of choice for that area.

We have the U.S., which may be in a period of a lost decade, given its high unemployment, relatively slow growth, and it’s huge fiscal deficit which has to be addressed at some point in time. And so we’re facing an environment in this upcoming budget which is unlike ones we have faced for many, many years. We did have recession in 2008 and 2009, but it was very clear what we were facing at that time. Now we’re still seeing aftermaths of that recession and how countries are adopting or reacting to that.

And there remains huge questions marks as to what is going to happen. We have a situation whereby governments at both levels — federal and provincial — are restraining their rates of growth, cutting back on the stimulus that they put in earlier, which is having a drag on economic growth.

We have households who are overly indebted. In fact, even the government is saying, “reduce your debt balances.”

Mark Carney says that all the time —

That’s right. And in order to do that you’re going to have to restrain your spending in order to increase your savings. You have an international market that is very unsecure and our exports and imports are not going the way that they should be going in a sense of helping to spur economic growth in Canada.

Then you have the whole issue of the business sector, who despite having record profits — record cash balances anyway — are not investing in order to lead to growth in the economy. And so there’s a lot of question marks as to what is going to happen — both in the short term and in the near term.

And so we’ll be looking at those economic projects that the government will be putting in this budget, which will form the basis of the fiscal projection to see if they are credible and recognize the various risks that the government could be facing.

Scott you were behind the scenes many times not perhaps exactly like this, but how do you even begin to respond to some of these concerns as you go to prepare the budget?

Well, I think that what Pete is getting into now is taking us into questions of prudence and transparency.

Let me just deal with a followup comment on what Pete was just saying.

We have been recommending that the Department of Finance actually should be responsible for the economic forecast. They have a large group of individuals in the department who are very good at forecasting and therefore they would be better than simply taking the average of 14 private sector forecasts. Now, Mr. Flaherty this week is meeting —

Today, yes, right.

— with his forecasters. And he will talk to them, perhaps although the time between now and March 29 is rather short so we don’t know what impact those comments will have on his forecast. The budget is pretty much locked up by now.

But it would be really helpful if the Department of Finance in its budget documents would give us a better sense of how the forecasters see the world. If you take an average, you know some will be more optimistic, some will be more pessimistic. And the information that you get with the budget doesn’t tell us any of that. It just gives us an average and says, for a small number of economic variables, how did that compare to last October when the minister made his fall economic update. But it would be very helpful if we could get a sense of the uncertainty associated with the forecast.

We’re going to talk later in another podcast on the issue of prudence because the greater the uncertainty, the more prudence should be included in the budget.

And I guess on that, he’s meeting with private sector economists today. And the reason why he’s meeting today is that on Friday, Statistics Canada came out with their first estimate of the fourth quarter, last year’s fourth quarter, and the initial estimate of what economic growth was for the year as a whole. Now that’s one number. What you have to do is dissect that number and understand the major forces that are behind that number. What are the sources of strength, what are the sources of weakness.

And so in less than two days he’s asking these private sector economists to now give their sort of best guess as to what’s going to happen in 2012 and beyond in order for him to come up with economic forecasts for budget-planning purposes. These economists haven’t even finalized their own forecasts and he’s asking them for their views. From my understanding, he’s going to be with them for less than an hour. The media can come in at nine o’clock and take some pictures and then at 10 o’clock he rushes off to address the media as to what these economists have told him.

In the past, we would have half-day, if not full-day sessions with these economists in order to get their views as to the major strengths and weaknesses of the government and challenges that the government was going to be facing in the years ahead.

I would like to talk a little more about what has happened in years past, but maybe let’s just sum up this podcast by observing again that the U.S. economy is showing signs of life but make take years to resolve its deficit and debt problems. Canada is facing serious challenges. And as we’ve just talked about, how the budget reflects these developments and uncertainties will be key to determining its credibility.